Google – From Russia with Love pt. II

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Russian ruling could have global implications. 

• Although the Russian complaint against Google is a sideshow compared to the EU, it could materially weaken Google’s global agreements that allow it to ensure its ecosystem is on almost all Android devices in developed markets.
• The Russian regulator (FAS) has already fined Google $6.75m for requiring handset makers to install its services on their phones to be able to use its App Store: Google Play.
• FAS also came down on Google for refusing to allow other third party services such as Yandex Search to be pre-installed.
• However, Google appears to have already dropped this requirement and Yandex has seen a corresponding increase in search share in the Russian market.
• The Google agreements that really matter are the MADA and the AFA.
  • Mobile Application Distribution Agreement (MADA).
  • This agreement requires anyone wanting to use Google Play to also include the key Google services such as search, mail and maps and to display them prominently in a folder on the home screen.
  • RFM research indicates that it also requires these services to be set as default on the device such that a request from an app to open a map always defaults to Google Maps.
  • This ensures that it is Google’s Digital Life services that are predominantly used and it is this bundling that both the FAS and the EU object to.
  • The Anti-Fragmentation Agreement (AFA).
  • This agreement is required for a handset maker to deploy Google Play and prevents the manufacturer from producing other devices that use non-Google versions of Android.
  • This prevents any handset maker from providing any alternative to Google on any Android device anywhere in the world.
  • I suspect that this has been a factor in Google’s ability to dominate the Indian market where it is now almost impossible to sell a device without Google Play on it.
  • Google has effectively seeded the Indian market with its services and the game may already be over for the home grown alternatives.
• In addition to the fine, the FAS has also demanded that Google change these agreements with device makers.
• Google has appealed this decision and a hearing is scheduled for August 16^th.
• While the MADA is signed on a device by device basis, the AFA is a global agreement and should the FAS force Google to relax the AFA, then it could have global implications.
• This is because handset makers would then be free to user other versions of Android without Google services being installed potentially weakening Google’s grip on Android in markets outside of Russia.
• Furthermore, the FAS’s decision will provide precedent which, in legal conflicts such as this, can be highly influential in determining the outcome.
• I continue to be concerned that Google’s grip on its ecosystem on Android devices may be slipping bringing into question RFM’s medium term revenue forecasts.
• Most of Alphabet’s revenue growth from here is being driven by advertising revenues derived from Android devices, raising the possibility that RFM’s numbers are too high.
• Even assuming that nothing goes wrong, the shares of Alphabet look fairly valued at best, leading me to believe that there is better value to be had elsewhere.
• Samsung, Microsoft and Baidu continue to be the places where I would be looking.